By Tiernan Ray

Barclays analysts today offer up a 72-page note to clients summarizing what they think is the “digital roadmap to the future” for electronic payments technology, predicting that a wave of change will by 2025 “challenge the traditional legacy payment architectures that are expensive, inflexible and therefore not always able to respond to the changing demands of users and consumers.”

They have Equal Weight ratings on shares of Cielo (CIEL3.Brazil) and Wirecard (WDIGDE), based on valuation, and on PayPoint (PAYP.London), which may be at risk from “payment digitalization.”

According to the authors, owners of the so-called scheme, the structure of today’s payments, like Visa (V) and MasterCard (MA), mean the whole process of paying for things is like being stuck in the 1960s:

The root of our current retail payment systems was driven by the invention of the general purpose credit card and the ATM. These technologies were conceived in the 1960s with most of the solutions built around these systems completed in the 1970s and 1980s. Whilst these systems have proven to be efficient and convenient, they have a relatively high cost, and modifications to these legacy systems are time consuming and expensive, resulting in limited innovation to date. Another reason for the limited innovation over the last five decades was the dominance of scheme owners and financial firms, which raised high barriers of entry by scale, proprietary distribution channels and financial licensing. This is changing with connectivity breaking down the power of proprietary distribution channels and digitalisation attracting new companies to the payment ecosystem. Thus, this once steady, stable industry has become a magnet for investment and innovation. The dominance of the legacy systems have forced a large part of new methods to be compatible with legacy systems (like m-wallets running on existing rails), but we are increasingly seeing payment solutions looking to bypass the existing rails to reduce cost and complexity, whilst creating better usability.

The first big shift coming is the move to “contactless” payment systems, as security issues are tackled:

Over the coming five years we anticipate a gradual change in consumer form-factor to contactless, most likely at the expense of cash, which still attracts high volumes. Initially this will likely be mainly card based, but towards the end of this decade, we also forecast an increase in contactless payments via the mobile (i.e. wallets). We believe the rate of adoption will be driven by three key factors: ubiquity, privacy and convenience [...] We expect that over the coming five years we will continue to work with security tokens such as a PIN, biometrics or signature, which come at the expense of simplicity, speed and accessibility. For smaller transactions it is likely that we will not need security tokens and we also expect “secured” payment zones, where lighter security is adequate.

There will be some move away from that traditional schema toward systems that cost merchants less in fees, they argue:

Over the coming five years we expect the existing payment rails to remain dominant. However, we are also expecting to see increased success of closed-loop systems (like Starbucks, MCX, Alipay, etc), Peer-2-Peer (Paym) and some wallets (SEQR from Seamless, PayPal), which use the ACH rails and thereby bypass international schemes. Such schemes are attractive for the merchant as it substantially reduces the Merchant Service Fee and removes a large part of the friction costs out of the economy.

Visa and MasterCard are pushing their own initiatives to not be left out:

Scheme owners like Visa and MasterCard are realising that they need to take action not to lag behind the expected replacement of plastic with digital payment methods. For example Discover signed onto Google Wallet and Isis, in addition to partnering with PayPal to bring the latter’s wallet to POS. Visa launched the V.me wallet, MasterCard is forging deals to expand mobile and prepaid (like with Western Union) payments globally, and American Express is courting the un(der)banked and gamer markets. Similarly banks have a lot to lose and need to be at the forefront of this development, but, given the rapid innovation, they might struggle.

Watch moves by Apple (AAPL) and Google (GOOGL), the authors urge, such as “beacons,” using Bluetooth wireless connections, which “could also drive adoption of mobile payments,” and various forms of Bitcoin usage:

Due to the shift to non-proprietary POS terminals there is a trend towards mobile POS. Apple was one of the first companies to invest into fully mobile integrated POS solutions in 2009 in Europe, with the Ingenico iSMP product. We are starting to see this now become more mainstream due to its ability to save space, reduce queues and drive sales due to analytics, inventory control, etc. [...] Founded in 2011, Blockchain is a website, app, and wallet service that provides extensive statistics and data around the Bitcoin economy, as well as a wallet for customers. Blockchain Wallet was the first client side JavaScript Bitcoin wallet providing a simple and secure way to store Bitcoins. To date, Blockchain is the most popular web-based Bitcoin wallet and the most visited Bitcoin-related website. The company recently launched its Android app and its iOS app, which was removed from the Apple store in February, (like all other Bitcoin related apps) was reintroduced in July.

A big question is how the ecosystems of Apple and Google and Facebook (FB) may or may not dominate payments:

Google Wallet offers users the ability to send money via Gmail and there is speculation that Facebook is building a payments platform in the style of PayPal6. Taking the view that digital money is simply data that needs to be processed and protected in similar ways to any other source of personal data could arguably lead one to the conclusion that the internet giants are the best placed to meaningfully displace the activities of banks and financial systems. Apple, too, has an extensive ecosystem in place with payment functionality embedded across its hardware-to-media product set. While the first wave of internet banks, much like data centre vendors, were seemingly too early, internet quality and adoption now makes this a viable proposition. It seems logical that success in areas such as wallets or peer-to- peer remittance would spur these vendors to expand more fully into traditional banking and payment activities.

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AUGUST 8, 2014 4:30 A.M.

Tom the Europe kid wrote:

Barclays (or the author of this piece) forgot Swedish based ompany "Seamless SE" - in 2013, it won the Mobile Money Global Award for Best Mobile Money Deployment in Europe (contest was in Dubai). Furthermore, it has agreements with McDonalds, Ingenico, ... .

AUGUST 8, 2014 5:01 A.M.

Tom the Europe kid wrote:

Too fast with commenting, it has mentionned Seamless' SQR in the "less in fees" part. Apparently I was not good awaked this morning. Although I'm curious about this "mobile payment revolution".

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.